Thursday, February 26, 2009

Abbott Labs – Back to the Future

When I blogged recently about Abbott Laboratories (NYSE: ABT), I hadn’t expected to come back for a while. But, as I’m learning in the Blogosphere, things change.

Abbott is increasing its quarterly dividend 11%, its thirty-seventh annual increase (
www.smartmoney.com/news/on/?story=ON-20090220-000734-1120 ). This was an opportunity to return and blog some more. Miles D. White, Abbott’s CEO, was upholding Guy’s Eighth Rule of Being a CEO, when in trouble, talk about the dividend, better yet, increase it.

The old saw about those who do not remember the lessons of history being doomed to repeat will really come into play here. What we’re seeing here is another of the large pharmaceuticals (does Abbott really even qualify as Big Pharma?) trying to keep up the pretense that it’s business as usual. Unfortunately, I’m only reminded of those recently unemployed who struggle to maintain their standard of living in order to convince their families and neighbors that everything is alright. One has to ask are they only really kidding themselves.

Monies that will be needed in the future are being dispensed today to keep the shareholders complacent. I still don’t see any reasons why Abbott Labs, along with several other pharmaceutical companies, won’t be traipsing up to the Hill in Washington in a few years looking for a bailout. Finding someone to blame other than themselves could be hard, especially by then. Big Auto blamed the banks. The banks blamed their borrowers. Giving that the drug industry will looking to the government for help, I suspect that they won’t be blaming Washington. But, hey, dumber things have happened.

I keep harping on companies like Abbott and Pfizer and issues like acquisitions (i.e., Wyeth), pursuit of the next “blockbuster” drug, and dividend increases because these are all busted strategies. Other industries like Big Auto and financial services have tried some or all of these and have come to naught. Why should things be any different this time?

A friend of mine (contrary to what Larry says, I do have some) once said that the definition of insanity was doing the same thing over and over expecting a different result. Get the picture. I know that I’m using up my quota of clich├ęs in this blog but isn’t that what they’re for, right?

We’re looking at an industry that’s on the cusp of changes that will be seismic in nature. There will be winners and losers. So far, I’ve been focusing on the behaviors that will signify the losers. Shortly, I’ll begin to blog about the characteristics of the winners. This is an industry in transition and we won’t be lacking things to blog about.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Tuesday, February 24, 2009

Pharmacaeutical Outsourcing - Another Shot Across the Bow

I admit freely that I have been fascinated by the topic of outsourcing in the life sciences sector, especially the pharmaceutical group. (Larry actually thinks it’s unhealthy, but, I think he worries too much.) So, when the New York Times (NYT) recently published a report (http://www.nytimes.com/2009/02/19/business/19clinic.html?emc=eta1 ) discussing an article (http://content.nejm.org/cgi/content/full/360/8/816 ) in the latest issue of The New England Journal of Medicine (NEJM) about the outsourcing of clinical trials offshore and the issues that are raised by this.

The NEJM and the NYT focus more on the ethical and safety concerns raised by these practices. I won’t rehash what they wrote, Natasha Singer’s article in the latter is an excellent piece of reporting and when you have the time, read the original NEJM article. Despite being written by several medical academics at Duke University, it’s a very readable article for the layperson. (I offer myself as proof.)

I want to focus on the economic and business aspects of this practice. (OK, I admit it, I’m a capitalist.) While there are some questions about the statistics used, there is definitely a trend to move clinical trials offshore. Despite protests to the contrary, I suspect that pharmaceutical companies feel that there is less FDA oversight and other forms of government regulation when they move offshore. Also, some of the countries selected may prove to be somewhat less litigious than American trial lawyers tend to be.

Lower costs, the perennial reason for outsourcing and offshoring is certainly another good reason for doing so.

But, what are the long term implications for the US pharmaceutical industry? Once again, we see a key US business differentiator that contributed to past American supremacy in the global drug industry being packed up and sent offshore. Besides the jobs lost, the early access to innovative treatments lost to Americans and the potential to enhance these differentiators are gone.

The major long term consequence is that US pharmaceutical manufacturers are assisting in the development of future competitors. The FDA should also stop and think about this for a bit. Once the genie is out of the bottle and new drugs are being developed, tested, and marketed abroad in a big way, the FDA is not going to be able to control policy as they have in the past.

In my recent blogs, I’ve been talking about changes in the life sciences sector and their long term implications. In particular, I’ve been hammering Big Pharma about the similarities to Big Auto. We’re seeing more evidence with this NEJM article. By itself, it’s not earth shattering. But, taken with everything else that’s going on, the future doesn’t look good for Big Pharma.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Thursday, February 19, 2009

Pfizer-Wyeth Redux--We Can't Help It!

I’m back on the Pfizer-Wyeth again. I can’t help myself. I feel as if l’m in that dream we’ve all had of being in a slow motion crash again and again. Here’s why.

Let’s start with the overall economy. Since last autumn, we have CEO’s either being excoriated in the press or by Congress. Obviously, there have been some serious shortfalls in abilities here. Now, let me ask a question, just because Big Pharma hasn’t been dragged up to the Hill yet by Congress doesn’t mean that they won’t be. (Doesn’t mean that they will be either, but old Guy’s sticking his neck out again.) Honestly, there’s some good potential here. Have we seen anything yet from Big Pharma’s CEO’s to distinguish them from their colleagues in banking or automobiles? This is where I’d really like to get some reader feedback.

Next, let’s talk about sticking the collective heads in the sand and hoping that problems will go away. Let’s face it. Barack Obama has won the election. He took the oath of office (twice) and he’s now the President of the United States (POTUS for you acronym freaks out there). Despite some Republican protests, President Obama’s stimulus package has been passed and signed. So, anyone who doesn’t think healthcare reform isn’t coming soon to a hospital near you had better wake up and smell the coffee. Especially, if they’re in the drug or medical device businesses.

Another one of my favorite gripes about the healthcare industry, and most other industries as well, is it’s fascination with mergers and acquisitions. Don’t get me wrong in the right circumstances, with the right reasons and for the right price, these types of deals can make a lot of sense. But, please notice the qualifiers that I listed. There generally aren’t too many deals that meet those criteria and then, if there happens to be a bidding war then any value goes right out of the window. How many M&A deals over the last thirty years, in any industry, have lived up to their oft overhyped potential?

Finally, let’s get down to basics. Business is all about making things and then selling them. Good products and services with good customer service attract customers who pay their bills and come back to buy more. While you’re at it, hire good employees, treat them right, and improve your productivity as a consequence. But, Big Pharma seems to be ignoring this model. Many of them are moving to a portfolio model of buying new drugs, outsourcing everything that they can, and making their profits on the resulting margins. Not bad business if you can get it, but how many companies can be in that kind of a business. Possibly a few, but, certainly not as many as are in the pharmaceutical industry today.

Oh, and let me add that with few exceptions they are optimizing the "blockbuster" model that no longer works. And, has anyone explained the law of large numbers to these people--combining two multi -10's of billion dollars business into one, taking on "synergy targets" has been at best short on results albeit high on promises.

So, let’s see what happens this year. If I’m wrong, I think I’ll find out soon enough.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Tuesday, February 17, 2009

What Does Barron's See in Abbott that We Don't?

We’re well into the second month of the year, the world hasn’t fallen apart as some had predicted. But, then things haven’t taken off as others had hoped. Things are kind of, please excuse the technical term, blah.

Yet, some people are still back in the good old days, or, wish that they were. I found an example in this week’s Barron’s. Neil A. Martin penned an article about Abbott Laboratories (NYSE: ABT) entitled “Abbott Labs: a Prescription for Success”. He paints a very optimistic picture for Abbott. Yet, somehow, I couldn’t help but think that I’ve heard this all before.

Much is made of Abbott’s drug pipeline and how, unlike its competitors, they aren’t about to have any patents expire soon on their key products such as Humira, Niaspin, and Similac. OK, but, don’t patents eventually expire? (OK, I know some of you are snickering out there in the Blogosphere and saying to yourselves, “Not if you’ve got good lawyers.” I don’t buy that and will deal with you in a future blog.) They do. In some parts of the world, like India, they don’t care about your patents and if you try to introduce your products there, you’re going to run into the buzzsaw called ‘generics’.

Much is made of Xience, Abbott’s drug eluting stent acquired from the late Guidant Corporation. Between stents, drug eluting or otherwise, becoming a commodity and the risks from government healthcare reform, I’m not so sure that I’d get too excited about this.

Now, I don’t want to appear to be too critical. Neil does mention Wall Street’s concerns about Abbott’s growth being unsustainable. Though, he does try to minimize their arguments.

CEO Miles D. White is quoted as saying that Abbott if done with acquisitions for a while thereby violating Guy’s Third Rule of Being a CEO, always talk about the possibility of acquisitions. I suspect that White realizes that he can’t do acquisitions anymore for a variety of reasons ranging from financial to organizational.

Here’s why I’m harping on this article and poor Martin. Things have changed in the life sciences sector significantly over the last few years and will continue to do so. Pipelines come to an end. Companies without strong intellectual capital and lengthy track records of scientific achievement, not necessarily resulting in new products, cannot achieve these overnight. Companies with these assets are led by PhD’s in the sciences, MD’s, and similar credentials not MBA’s from Stanford University accomplished in the legerdemain of corporate finance.

The recent lessons from Wall Street and the American banking industry should be sufficient proof that there’s more to running to running a successful business than just a mindless shell game of assets shuffling.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Wednesday, February 11, 2009

Healthcare Reform – Will Big Pharma Get a Reprieve?

Has Big Pharma gotten a temporary reprieve from threatened reforms from President Obama? Last week’s withdrawal by Tom Daschle from consideration as the Secretary of Health, Education, and Welfare and his office’s admission that there was no immediate replacement doesn’t bode well for quick reform.

Also, given the problems President Obama is having gaining bipartisan support for a stimulus package that everyone agrees is needed, think what will happen when he tries to push healthcare reform through the Houses of Congress.

A cynic might say that Treasury Secretary Timothy Geithner was approved despite his tax problems because everyone felt that he was the man and this was his moment. The same cynic might also say that Tom Daschle knew that Congress wasn’t ready for him and this was certainly not his moment.

What does this mean for Big Pharma? One pending issue that some of us have been writing about is what happens when President Obama gives the go ahead to Medicare to negotiate volume purchase discounts for prescription drugs with the pharmaceutical companies. Revenues will certainly contract. I don’t think volume increases will offset the price decreases unless there is a new, national commitment to really overmedicating the country.

Now, if the Obama Administration is too distracted to go after healthcare reform then Big Pharma may get a temporary reprieve this year. This will be a good thing for Big Pharma. Many drug companies have major patents expiring this year and their replacements are not exactly setting the world on fire. Getting pounded on their remaining products would not have been a good thing.

I’m going to stick my neck out and say that this year’s, 2009’s, revenues will probably be safe from Federal tinkering. Going a little further out, 2010 and beyond, I think the risks increase significantly. Here’s why. First, the economy is not going to improve any time soon. The Republicans are on the defensive and when their constituents start screaming about government assistance because they’ve lost their jobs, homes, savings, etc. then we will really start to see bipartisan support. Especially, as we start to draw closer to the midterm elections in 2010. Next, once the Federal government really lets loose and starts to spend, someone’s going to realize that we’re spending too much. That means other someone’s are going to start finding places to save money. Medicare spending for prescription drugs is a great place to start. Even John McCain hates Big Pharma. I recently saw an article which indicated that the Obama Administration is reviewing the U.S. nuclear arsenal. They’re getting serious. The sacred cows are going to be gored.

Big Pharma’s going to have a tough year in 2009. President Obama’s current troubles may buy them a little time but it will come back with a vengeance next year.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Sunday, February 8, 2009

Wow - What a Week for Pharma M&A and Our Opinions on What's What

Larry and I have been blogging a lot recently about the Pfizer/Wyeth merger and some other possibilities. I want to spend a little more time because I think that it’s fundamental to what’s happening in Big Pharma right now. Also, with Tom Daschle dropping out of consideration for a Cabinet post, President Obama won’t be able to start his agenda for U.S. healthcare policy for a while, so we have some time to focus on M&A activity in the BioPharmaceutical Sector.

While I’m still not a big believer in the sense or economics of mergers in the drug industry, they sure generate a lot of ink in the press. (Or, are they are electrons in the age of blogs? I’m having a difficult time adapting my metaphors to the Internet age.) I get the reasons, falling stock prices, lots of cash on drug company balance sheets, and CEO’s desperate to do anything to appear to be adding growth to the top line. Also, the lack of any real news seems to engender a lot of wishful thinking out there in the media.

Here’s one example. Jim Cramer over at CNBC recently blogged (
http://www.cnbc.com/id/28813740 ) about the possibility of a merger between Abbott Laboratories (NYSE: ABT) and Celera (NYSE: CRA). Seems that Abbott’s CEO, Miles White, has been talking about the possibility of acquisitions (But then don’t CEO’s always talk about this? This is Guy’s Third Rule of Being a CEO.), and they are both already working together in the area of personalized medicine. Jim admits freely that he is only speculating here, but, given the article in Barron’s which came out today chiding him about his track record in making predictions, I don’t think I’ll put much into this one. I did find Jim’s summary of personalized medicine interesting and I’ll return to this in a future blog.

Meanwhile, Mike Huckman is keeping hopes alive over at his blog (
http://www.cnbc.com/id/29014145 ) about the possibility of Roche (SWX Europe: ROG) acquiring Genentech (NYSE: DNA) in a hostile takeover. This was his second prediction for the pharmaceutical industry in 2009. Now, I’m not picking on Mike. I have a lot of respect for him. But, looking at his photo on his blog, I think I can safely say that I’m a few years older than him. OK, maybe more than a few years. Anyway, my point is that since 1976 when Robert Swanson and Dr. Herbert Boyer launched Genentech, I’ve been hearing people talk about a hostile takeover. It’s a perennial. Also, as I’ve blogged before, this kind of deal doesn’t make sense to me.

This week, Merck's (NYSE: MRK) CEO, Richard Clark stepped back from their long standing high and mighty point of view against mergers and "hinted" (
http://blogs.wsj.com/health/2009/02/03/as-sales-slump-merck-ceo-clark-looks-to-acquisitions/ ) by saying “I don’t think any CEO in this environment can categorically rule out any transaction,” Clark said, according to Dow Jones Newswires. “There are opportunities across the whole spectrum we would look at.” We're not that clear on the position Andrew Witty, Glaxo's new CEO is taking first saying that there will be no acquisitions, and then suggesting "bolt-ons" and then suggesting that acquisitions will take a prominent role as Glaxo looks to back away from the traditional big pharma "Blockbuster" model and move further into consumer, vaccine and emerging markets (http://www.natap.org/2009/newsUpdates/010909_05.htm ). It may be of some interest that almost simultaneously and representing only about 1% of the value of the Pfizer-Wyeth deal, Glaxo acquired UCB's emerging market business for $687 million. In the meanwhile, Astellas launched a $1 billion hostile tender for CV Therapeutics (http://www.dealmakersforum.com/) and rumors continue to abound about a potential BristolMyers-Squibb-Sanofi hook up. Quite a week!

Other possibilities exist including Carl Icahn's continuing pursuit of "enhancing shareholder value" (e.g. sale to a Big Pharma company) at Biogen-Idec . That’s the fun thing about this kind of market, anyone can speculate about anything, even me. Let’s see what happens, I think that this is going to be a very interesting year.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Friday, February 6, 2009

FDA Section 912 -- A Bonanza or Distraction to Big Pharma??

Larry and I have repeatedly blogged about the declining state of Big Pharma’s pipeline and their poor future prospects. I’ve been curious, what happens next? Where does Big Pharma go to keep its revenues and earnings growing? There is an obscure FDA amendment that may potentially provide a net incremental revenue source for the industry.

Recently, the National Health Alliance (NHA), a nutritional health community political organization, published an article entitled Stealing Nature’s Thunder, Will Big Pharma be allowed to monopolize natural nutrition? (
http://www.nha2004.com/index_res.asp?w=1280&h=800 ) expressing concern that large pharmaceutical companies could stake out exclusive turf in natural compounds and food supplements by simply conducting clinical trials. This move is not without precedence already and likely can be expanded so that "everyday" remedies become prescription and/or more regulated. To a public already suspicious of the drug companies this is just adding fuel to the fire.

Section 912 is contained in the Food and Drug Administration Amendments Act of 2007 and is viewed with considerable suspicion by the health food industry, their customers and supporters because it could permit natural compounds to be treated, and regulated, like drugs. The article mentions substances like oat bran fiber, fish oil, probiotics, CoQ10, and various vitamins, minerals, and herbal products which could move into the captive orbit of Big Pharma.

This article caught my eye because I’ve been trawling the Web and media for ideas about what pharmaceutical companies could do next to supplement their vanishing pipelines. Section 912 could be used by drug companies to extend their reach, or is it grasp, over substances traditionally viewed as natural remedies.

Companies with strong research and development groups and marketing, not to mention legal staffs, would probably benefit most from this type of move. Of course, if traditional purveyors of these natural products could find themselves at a disadvantage if they find themselves in the cross-hairs of the Food and Drug Administration (FDA). Not having the aforementioned resources would place natural remedy providers at a considerable disadvantage.

I think that we’ll see more activity in this area as we move into the next decade. The usual practices of buying up competitors, after having their purchase prices driven up in bidding wars, laying off workers, consolidating operations, and then rolling jobs offshore will probably be in use.

OK, now here’s the catch, what does Big Pharma know about natural remedies? Not a lot, I’ll wager. Some of the cynics out there among you may say that they don’t know much about the drug industry either. This will turn out to be yet another distraction from Big Pharma’s core businesses. Further, given the new administration in Washington, D.C., rolling over a successful, American industry, wrapping it up, and then rolling it offshore probably won’t make many new friends there. So, maybe this won’t come to play, but, the moths can’t seem to help themselves as they are drawn to the flame.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Wednesday, February 4, 2009

If Pfizer-Wyeth is Absurd, What do you think about BMS-Sanofi or BMS-Biogen-Idec or even BMS-Amgen or Sanofi.....?

It's no secret that Guy de Lastin and I feel very strongly that the Pfizer-Wyeth merger is a train wreck about to happen.

However, as long time members of the Life Sciences Industry, we know better than to think that this merger will be the only one to occur this year despite our earlier views (see our multiple blog articles on this subject over the last few months) that
there is no rational and compelling reason for these companies to consolidate.

So, let us speculate about what could happen next. Many Wall Street analysts and august financial papers suggest that BristolMyers Squibb (NYSE:BMY) is a maiden in distress and is being dressed up by its "savvy" management team to be taken to the alter.

If BMY is acquired, the leading contender may very well be Sanofi-Aventis (NYSE: SNY) of Paris. There was an extensive article in yesterday's Financial Times on this subject http://www.ft.com/cms/s/0/27be6860-09a-1dd972c0000779fd2ac,_i_email=y.html) and the truth be told, there is some merit in their thinking. SNY has lots of cash, a new CEO Chris Viehbacher, ex-Glaxo and runner up to Andrew Witty for that CEO job who is anxious to make a mark for himself by "expanding and diversifying" their business. And, oh lest we forget they share rights to PLAVIX, both companies' largest blockbuster and one that is beset by potential generic competition.

Let's suppose BMY want to be the acquirer, not the "acquiree". BUT, wait a minute, didn't BMY very recently get outfoxed by Eli Lilly (NYSE:LLY) in a very expensive acquisition of Imclone Systems and its blockbuster oncology pipeline known as Erbitux? It seems to us that BMY's strategy was a combination of expanding its oncology franchise, diversifying into large molecule (e.g. Biotechnology) science and hanging onto some potentially massive blockbuster extensions? If you believe that and BMY's management has learned a lesson,why not think that BMY looks at Biogen-Idec (NASDQ: BIIB) as an alternative or parallel version of its Imclone thinking. With a market cap of $14 billion or so, it could be affordable-NOT cheap, but very attractive with marketed and developing drugs in the areas of oncology, neurology, immunology, and cardiology in the United States and internationally. Its product set includes AVONEX for the treatment of relapsing forms of multiple sclerosis (MS); RITUXAN for the treatment of relapsed or refractory low-grade or follicular, CD20-positive, B-cell non-Hodgkins lymphomas, or B-cell NHLs; TYSABRI for the treatment of relapsing forms of MS; and FUMADERM, an immunomodulator for the treatment of severe psoriasis (http://finance.yahoo.com/q/pr?s=BIIB). This would be a very interesting fit with BMY's marketed products and pipelines. However, THE SAME COULD BE ALSO SAID FOR SNY!! Think of the fun, merriment and mirth that the bidding war could become!

Now, just for the pure joy of it, let's suppose that Amgen (NASDQ:AMGN) were thrown into this mix. What a powerhouse of a company despite some near term challenges. An attractive mix of marketed therapeutic products in supportive cancer care, nephrology, inflammation, and oncology. The company's principal products include Aranesp and EPOGEN that stimulate the production of red blood cells to treat anemia; Neulasta and NEUPOGEN, which selectively stimulate the production of neutrophils, a type of white blood cell that helps the body fight infections; and ENBREL that blocks the biologic activity of tumor necrosis factor by inhibiting TNF, a substance induced in response to inflammatory and immunological (http://finance.yahoo.com/q/pr?s=AMGN) and a potentially "golden" pipeline in each of these areas. One small challenge, AMGN's market cap at almost $60 billion dwarfs BMY at about $45 billion which at best suggests a merger of "near-equals" albeit some potentially very reluctant management and shareholders who may very well question the "synergies" and "value creation". Again substitute SNY (market cap over $75 billion) and does it make any more sense-we don't think so-do you?

As always, we are interested in your comments, please send them to larryrothmansblog@gmail.com

Contributed by Larry Rothman